Facebook was in the financial news throughout all of 2012 because of the company's dramatic journey to becoming a publicly traded company. If you remember the dot-com boom of the late 1990s, Facebook's IPO may have reminded you of those days when seemingly anyone with an idea and a web site could raise millions of dollars, even if they didn't sell anything.
Facebook offered its shares to the public at $38 per share. Unlike other companies with IPOs, the price per share didn't jump. That was a good sign. Like other Internet companies in 2012, the price went down over time—as low as $17.55 per share. It reached $80 per share in early 2015. Doubling over three years is a good return, but it's no tenbagger stock.
The initial price and Facebook's behavior over the years can tell you something about stocks and the market and other investors.
What is a Stock's Share Price?
Before you can buy a share of Facebook you have to find someone willing to sell a share of Facebook. Then you have to agree on the price.
At any moment in time, a stock has at least three prices: what someone's willing to sell it for, what someone's willing to buy it for, and what the company is really, truly worth. (The last price is a little bit complicated because there are various ways to calculate that value, but imagine that we can look back from ten years in the future, knowing exactly how much money Facebook made for its owners. That number and its present value is what we're trying to figure out when we talk about what the company is really worth.)
Why is a Share Price What It Is?
What's the price someone's willing to buy a share for? At maximum, what they think the company is worth, and probably a little bit less. (You don't merely want to break even, do you?)
What's the price someone's willing to sell a share for? Maybe they've earned enough money and want to take their profit. Maybe they've found a better opportunity elsewhere. Maybe the stock went way down since they bought it and they want to cut their losses. Whatever the case, you can't tell what a company is really worth from how much someone is willing to sell it for.
Remember that insight. The current stock price is not always tied to the value of the company.
That leaves people who've calculated what they believe is the true value of the company and its true earnings. The company is likely to be worth that much. If it's on sale, they might buy it.
Why do People Overpay for Stocks?
People buy stocks even if the price is above that intrinsic value. Why? Because they believe that other people will be willing to pay more for that stock in the future.
Stock prices go up for only two reasons. First, the company earns more money for its owners, so its intrinsic value increases. Second, there are more buyers than sellers, and so they increase the prices they're willing to pay to entice sellers to sell.
Why would you pay more than the intrinsic value for a stock? Because you believe that in the future, you can find someone who will pay even more than you did for it. This is why penny stock investing is so risky; there's rarely anything there except for speculation.
How to Analyze Post-IPO Stocks
What's Facebook's intrinsic value? That's hard to predict. The company doesn't have enough history to predict the money it can generate with any certainty.
What's Facebook's current revenue? That's a complicated question you have to figure out for yourself by reading the documents Facebook and its issuing banks filed with the Securities and Exchange Commission, if you can even believe those numbers. Some people claim that Facebook didn't disclose all of the relevant numbers before it went public, leading to the Facebook IPO lawsuit.
What's Facebook going to do to make more money next year and the year after that and so on? That's the second most important question. The most important question is "Can Facebook pull it off?"
Maybe! With a time machine set for ten years in the future you can find out. Right now, there's not enough evidence to say one way or the other. Facebook's stock price dropped to half of its IPO price for a time, but it's gradually come back up, even doubling its IPO price. These things take time; Facebook has to demonstrate that it's worth its current valuation, that it can bring in revenue from its operations, and that it can return value to shareholders.
Should You Buy Facebook stock?
In the absence of a history of financial records to use to find the right price for Facebook shares, a value investor would say "no". Maybe Facebook will make a lot of money next year and the price will go up, but there's no evidence one way or the other. That's a gamble, and not an intelligent investment.
If you instead believe that other people will think that Facebook is worth more next year than it is today, that there will be more buyers than sellers, and that you can find a buyer willing to pay more than you paid for it, you can make that gamble if you want.
Yet remember that chasing a gamble is risky: the ownership structure of the company will pay you less than what you would get from other companies, you may lose money, and you may lose the opportunity to invest that money in the stock of a company that really is making money for—and returning it to—its owners.
Who Owns Facebook Anyway?
Facebook founder Mark Zuckerberg owns 57% of Facebook's stock. Sure, he has a board of directors, but he has 57% of the votes in the company. If every owner voted against him, he would still win by an easy majority.
As Matt Yglesias wrote in Why Facebook Will Never Stop Spending, this ownership has a huge implication on the company's merger and acquisition strategy. Simply put, it's better for Zuckerberg to spend the company's money acquiring other companies than it is to pay dividends, because he makes more money that way.
In other words, don't expect a Facebook dividend any time soon.
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